National Insurance: are the Tories this useless?
OK, for those under a brick, headline news most of the last week has been the argument between the two Labservative parties over the planned National Insurance increase. It's dull and longwinded; palpably obviously, no one commenting on it in the media seems to actually understand it at all. Boy George Gideon Osborne doesn't.
I suspect Darling does, but is keeping schtum for political reasons, and I'm pretty sure Vince is doing the same. Why would they both do this? Y'see, unless my understanding of economics generally is completely off base (and I've been trying to do a lot of understanding of economics over the last 5 years), increasing National Insurance does cost jobs. Channel 4 FactCheck certainly think so. Here's why:
It's all about Tax Incidence and Marginal Costs. Putting it simply, employers pay people to do stuff if the value of the work they do for the company is more than what the cost of employing someone is.
It's not about the overall tax bill, it's about whether hiring, say, an extra bartender is worth it for the pub. If there's a rush on, and you're short staffed, you lose custom. If there isn't a rush on, and you're over staffed, you lose money. Make a judgement as to how many staff you could do with, and factor in how much it'll cost.
less jobs are cost effective
Two staff doubles the staffing cost, but if you only get 50% extra customers, is it worth it? That's marginal cost. Put the marginal cost up (which NI definitely does), less jobs are cost effective, so employers cut back. They have to; you simply don't pay people to do work that doesn't benefit the business if you want to stay in business.
It's not the employer that pays extra
The other effect is tax incidence, or who pays. Every study I've seen shows that if you put payroll taxes up, it's not the employer that ends up paying extra, but the employee, as the wages go down.
Goes back to the cost/benefit thing; if the cost overall is too high, then the benefit isn't good enough, the value to the employer of the work you do is fairly set, what they can pay you in terms of total cost is therefore set, if someone puts a tax on that cost, they'll reduce the cost over times in other ways.
If the cost is too high, the benefit isn't good enough
Masses of literature on it, but, y'know, Gideon actually knowing what he's on about would be a first, so that's what the fuss is about.
Note that when Vince has attacked the Tories on this, he's not argued with them too much over the NI stuff; he's argued with them over how they're going to pay for it; he's right to say that the money they're using is pretty much fictional, from what I can tell.
The "a price worth paying" argument
What the Govt could, and perhaps should, be doing is actually admitting that there will be a small decrease in the rate of fall of unemployment (which is basically what the above means), but that the greater economic stability makes us all better off medium term, etc etc etc. Y'know, the "a price worth paying" argument. Except that doesn't tend to go down well with the Trades Unions, who, well, are bankrolling their election campaign.
And I'm not sure, myself, that it is a price worth paying, there are better ways of raising money; capital gains tax taper relief anyone?
Isn't politics fun?
Oh, wait, no, this is several billions pounds of national debt and about 100,000 jobs we're talking about here. Not really fun at all.
comments on the original post on Dreamwidth. I'd prefer it if you comment there[1] if you are able to keep the discussion together. [1] If you are reading this, you very likely have an OpenID.
I suspect Darling does, but is keeping schtum for political reasons, and I'm pretty sure Vince is doing the same. Why would they both do this? Y'see, unless my understanding of economics generally is completely off base (and I've been trying to do a lot of understanding of economics over the last 5 years), increasing National Insurance does cost jobs. Channel 4 FactCheck certainly think so. Here's why:
It's all about Tax Incidence and Marginal Costs. Putting it simply, employers pay people to do stuff if the value of the work they do for the company is more than what the cost of employing someone is.
It's not about the overall tax bill, it's about whether hiring, say, an extra bartender is worth it for the pub. If there's a rush on, and you're short staffed, you lose custom. If there isn't a rush on, and you're over staffed, you lose money. Make a judgement as to how many staff you could do with, and factor in how much it'll cost.
less jobs are cost effective
Two staff doubles the staffing cost, but if you only get 50% extra customers, is it worth it? That's marginal cost. Put the marginal cost up (which NI definitely does), less jobs are cost effective, so employers cut back. They have to; you simply don't pay people to do work that doesn't benefit the business if you want to stay in business.
It's not the employer that pays extra
The other effect is tax incidence, or who pays. Every study I've seen shows that if you put payroll taxes up, it's not the employer that ends up paying extra, but the employee, as the wages go down.
Goes back to the cost/benefit thing; if the cost overall is too high, then the benefit isn't good enough, the value to the employer of the work you do is fairly set, what they can pay you in terms of total cost is therefore set, if someone puts a tax on that cost, they'll reduce the cost over times in other ways.
If the cost is too high, the benefit isn't good enough
Masses of literature on it, but, y'know, Gideon actually knowing what he's on about would be a first, so that's what the fuss is about.
Note that when Vince has attacked the Tories on this, he's not argued with them too much over the NI stuff; he's argued with them over how they're going to pay for it; he's right to say that the money they're using is pretty much fictional, from what I can tell.
The "a price worth paying" argument
What the Govt could, and perhaps should, be doing is actually admitting that there will be a small decrease in the rate of fall of unemployment (which is basically what the above means), but that the greater economic stability makes us all better off medium term, etc etc etc. Y'know, the "a price worth paying" argument. Except that doesn't tend to go down well with the Trades Unions, who, well, are bankrolling their election campaign.
And I'm not sure, myself, that it is a price worth paying, there are better ways of raising money; capital gains tax taper relief anyone?
Isn't politics fun?
Oh, wait, no, this is several billions pounds of national debt and about 100,000 jobs we're talking about here. Not really fun at all.
comments on the original post on Dreamwidth. I'd prefer it if you comment there[1] if you are able to keep the discussion together. [1] If you are reading this, you very likely have an OpenID.